AzTLA 2006 Conference Special Edition October, 2006
Why Trial Lawyers Should Use § 468B Settlement Trusts
You know the scenario well!
You have just settled a personal injury claim for a substantial
amount for Ann, who is permanently disabled as a result of her
injuries. She has a Medicare claim and a Medicaid lien. Ann is
eligible for Arizona Long Term Care System ("ALTCS") benefits and
will need a special needs trust. You made a derivative claim for a
loss of consortium on behalf of Ann's husband, Tom. The defendant
has a structured settlement broker who wants to meet with you and
Ann's family. How can you quickly tie up the loose ends and get the
money?
Ann's family is stunned and confused. They waited four years for
their day in court and the case settled on the courthouse steps.
The family is anxious and uncertain about the allocation of the
settlement between Ann and Tom. They have questions about a lump
sum payout, the use of a structured settlement annuity, and the
special needs trust. Ann is incapacitated, and will need to have a
conservator appointed for her by the probate court.
Qualified settlement funds, or § 468B settlement trusts, allow
for payment of the settlement into a trust. The defendant is
released upon payment to the trustee, and the trustee can
immediately pay the plaintiff s attorney's fees and litigation
costs, assuming they have been approved by the probate court. This
"stops the clock" so that plaintiff s counsel can carefully
evaluate settlement options. The plaintiff's attorney can continue
to update the lien information and negotiate with lien holders.
When the liens and the allocation of the settlement are resolved,
the trustee can still use a structured settlement annuity and the
special needs trust without adverse tax consequences.
As a trial attorney, you need to know how to use qualified
settlement funds!
Qualified settlement funds can be used to settle cases of any
value involving multiple plaintiffs or the personal injury victim
with a derivatively injured spouse, child or parent. They have many
advantages:
• Funding the § 468B trust removes
the defendant, their counsel, and their structure broker from the
litigation. They can pay and walk!
• The § 468B trust removes the
defendant from the allocation of the settlement amounts between the
various plaintiffs.
• Plaintiffs' attorney's fees and
other expenses can be paid immediately from the § 468B trust,
assuming probate court approval has been obtained.
• Plaintiffs receive the income from
the settlement held in the § 468B trust.
• Time is no longer a pressing
factor for the lien negotiations, allocations, probate proceedings,
selection of structured settlement annuity, or establishment of a
special needs trust.
What are the requirements of a § 468B
trust?
Treasury regulations § 1.468B-1(c) sets forth the following:
1) It must be a trust, account or
fund, which is established or approved by order of a court of law
(or government agencies) and is subject to continuing jurisdiction
of that authority;
2) It is established to resolve
contested or uncontested claims asserting liability for a tort,
breach of contract or violation of law (not worker's compensation
or self-insured health plan claims); and
3) It must be a trust under
applicable state law, or the assets must be kept separate from the
assets of the tortfeasor, insurance carrier or other related
parties.
No constructive receipt!
A defendant can pay a settlement into a § 468B trust and deduct
the claim even though the payout to or for the benefit of the
plaintiffs occurs later. However, the § 468B trust does not
constitute constructive receipt to the plaintiffs because of the
restrictions placed on the § 468B trust. The plaintiffs' attorney
does not have custody of the fund. An independent trustee owns the
funds. This arrangement preserves the opportunity to use the
structured settlement annuity option, and to do so using one's own
brokers rather than those of the defendant.
Tax reporting details
A § 468B trust is treated as a corporation and is liable
for taxes on its modified adjusted gross income. Earnings are
subject to taxation in a manner similar to corporate earnings at
the maximum tax rate in IRO § 1(e). Settlement trusts are also
allowable deductions for administration costs and related expenses,
losses sustained in connection with the sale or exchange of
property, and net operating losses. Trust distributions to the
plaintiffs are not deductible and liability cannot be reduced with
tax credits. Qualified payments to a § 468B trust are not included
in the gross income of the funds.
Conclusion
When cases are ripe for settlement, and yet loose ends
remain, do not rush to make the many important decisions that
affect your clients for a lifetime. Use the § 468B trust to remove
the defendant from the equation, and allow you and your clients
time to properly evaluate the options.
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